The Federal Housing Administration (FHA) offers a guarantee to banks who write loans that conform to their guidelines. Because the bank is guaranteed to be repaid in case the borrower has problems, the banks are willing to offer loans to people that might not otherwise be able to get a conventional loan.
A conventional loan is offered by a bank without any guarantee of repayment from a government agency. Typically, these loans carry private mortgage insurance (PMI), which insures the bank in case of non-payment by the borrower for amounts over 80% of the property value. So, if the lender loans 95% of the value of the property, the private mortgage insurance covers them for 15%.
Conventional loans had been the loan of choice until the recent problems in California, Nevada and other places where the loans are not being repaid and the property values have dropped below the loan amount. Now, FHA is more favored because the risk to the bank is lower. The rates for both are similar.
Conventional loans typically are for 80% of the property value. A borrower can get an additional second loan to cover another 10% 15% or even 17%, making the combined loan-to-value ration equivalent to FHA's 3% down. Some conventional lenders also offer a single loan, rather than two loans.
FHA currently requires the buyer to bring at least 3% of his own funds to closing. This will rise to 3.5% at the end of September. FHA-guaranteed loans also have a mortgage insurance premium (MIP), similar to PMI. The MIP can be added onto the loan instead of being paid as a closing cost.
There are other types of loans, too, such as VA or Texas Vet and others. Each has their own advantages and costs.
Remember that buying a house is a little like buying a car. A car price may be quoted as +TTL (plus tax, title and license). Your house will have additional closing costs, like title insurance, survey, lender fees and so on, plus you will have to pay for your homeowner's insurance and put some money aside for property taxes, called prepaids. When someone buys a $100k house with 3% down, they wind up bringing more than $3000 to the closing because of the closing costs and prepaids.
A loan officer can explain in more details how it all works. Just ask.